Physics Fetishism Can Kill You

I remember in grad school we used to obsess about how economics, computer science and such lacked a "reference discipline" — you know, something legit, like physics. Here is a new paper on that subject from Andrew Lo at MIT:

Warning: Physics Envy May Be Hazardous To Your Wealth!

The quantitative aspirations of economists and financial analysts have for many years been based on the belief that it should be possible to build models of economic systems – and financial markets in particular – that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, "physics envy" has also created a false sense of mathematical precision in some cases. We speculate on the origins of physics envy, and then describe an alternate perspective of economic behavior based on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two concrete examples: the classical harmonic oscillator with some new twists that make physics look more like economics, and a quantitative equity market-neutral strategy. We conclude by offering a new interpretation of tail events, proposing an "uncertainty checklist" with which our taxonomy can be implemented, and considering the role that quants played in the current financial crisis.

More here.

Related posts:

  1. The Circle of Financial Envy
  2. First We Kill All the Economists, Part XXIV
  3. What Has Economics Ever Done For Us?
  4. Kill A9
  5. The Alcatel / Lucent Physics Test

Comments

  1. Lore says:

    I really couldn’t ask for more from this arcitle.